What the New TRA 2010 Means For Your Estate Planning Goals

The barrage of media attention has undoubtedly made you aware that on December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ("TRA 2010").

Transfer Exemptions and Tax Rates for 2011 & 2012

Included in TRA 2010 were a combination of changes favorable to taxpayers in estate tax, gift tax, and GST tax exemptions and tax rates, which apply for two years- 2011 and 2012:

A $5 Million Rather than $1 Million Exemption. TRA 2010 increased the estate tax, gift tax, and GST tax exemption amounts from the $1 million which was scheduled to take effect on January 1, 2011 to $5 million, meaning that, during 2011 and 2012, an individual can transfer an additional $4 million free from estate or gift taxes.

A 35% Rather Than 55% Tax Rate. TRA 2010 reduced the estate tax, gift tax, and GST tax rates to 35% as contrasted with the 55% rates which were scheduled to take effect on January 1, 2011.

Portability of Estate Tax Exemption. TRA 2010 also makes provision for "portability" of the estate tax exemption so that a surviving spouse may use the remaining portion of a deceased spouse's unused estate tax exemption. The effect is to allow a married couple to combine their estate and gift tax exemptions to an aggregate $10 million exemption, even if one spouse does not use his or her full $5 million personal exemption.

Planning Opportunities and Suggestions for 2011 & 2012

Gifting. The decreased tax rates and increased exemption amounts for estate, gift, and GST taxes scheduled to sunset at the end of 2012 provide significant planning opportunities for 2011 and 2012 including the opportunity to make significant gifts without incurring gift taxes, and even if a transfer would trigger gift taxes, the 35% gift tax rate is historically low.

GRAT Planning. Although Congress has expressed on many occasions its desire to curtail the use of Grantor Retained Annuity Trusts ("GRATs), TRA 2010 has not limited the use of GRATs. With interest rates at an all-time low, many clients are finding that this is an ideal time to create GRATs as a mechanism to make large tax-free gifts.

Review of Current Estate Plan. For the past several years many clients have been reluctant to review or revise their estate plans because of uncertainty about the future of estate tax, gift tax and GST tax exemptions, rates, and rules. Additionally, although TRA 2010 makes provision for "portability" of the $5 million estate tax exemption, so that during 2011 and 2012 a surviving spouse may use the remaining portion of a deceased spouse's unused estate tax exemption, relying on portability may not produce the most tax advantageous results for a family. Accordingly, we encourage you to review your current estate plan to determine (a) how these changes in exemption amounts and tax rates for 2011 and 2012 could impact your current estate plan, including how they might impact documents in which estate tax exemption formulas are used and (b) whether changes in your existing plan documents would better serve your estate planning goals.

Other Planning. There are a number of other useful estate planning strategies that still remain viable—and may be even more powerful—after passage of TRA 2010.

If you would like more information about this alert, or if you would like to schedule a time to review your current plan, please contact a member of Kegler Brown's Estate Planning group.